26Jun15

Assistant Attorney General Leslie R. Caldwell Delivers Remarks at the ABA's
National Institute on Bitcoin and Other Digital Currencies

Thank you Nina [Marino] for that kind introduction.

It is a pleasure to address today's ABA National Institute on Bitcoin and Other
Digital Currencies. As head of the Justice Department's Criminal Division, I
am privileged to lead over 600 attorneys who investigate and prosecute
federal crime, help develop criminal law and formulate law enforcement policy.
Our talented prosecutors perform crucial work in many of the areas relevant to
today's discussion, including the fight to combat money laundering, financial
fraud, child exploitation and cybercrime.

This afternoon, I'd like to discuss the department's approach to the emerging
virtual currency landscape, our ongoing efforts to prosecute those who commit
crimes by using virtual currency, and our view that compliance and
cooperation from exchanges, companies and other market actors can ensure
that emerging technologies are not misused to fund and facilitate illicit
activities.

The department is aware of the many legitimate actual and potential uses of
virtual currency. It has the potential to promote a more efficient online
marketplace. It also potentially can lower costs for brick and mortar
businesses, by removing the need to pay credit card-related costs. And in
theory, it can help speed and reduce the cost of cross-border transactions.
But we also have seen that criminals have been among the first to
enthusiastically embrace the use of virtual currency, primarily in crime
involving the internet.

Many of the inherent features of virtual currencies are exactly what makes
them attractive to criminals. Many criminals like virtual currency systems
because these systems conduct transfers quickly, securely and with a
perceived level of anonymity. For others, the irreversibility of payments made
in virtual currency and lack of oversight by a central financial authority is
appealing. Finally, the ability to conduct international peer-to-peer
transactions that lack immediately available personally identifying information
has made decentralized virtual currency attractive to those who wish to cover
their money trail.

As a result, virtual currency facilitates a wide range of traditional criminal
activities as well as sophisticated cybercrime schemes.

Much of the illicit conduct involving virtual currency occurs through online black
markets such as the now-shuttered Silk Road, which operated on an
anonymized "dark web" network that masked users' physical locations, making
them difficult to track. Similar online black markets continue to operate,
offering on a global scale, a wide selection of illicit goods and services. While
these have included more traditional crimes such as narcotics trafficking,
stolen credit card information, and hit-men for hire, we have also seen a
significant evolution in criminal activity.

For example, Bitcoin has been utilized to fund the production of child
exploitation material through online crowd-sourcing - a development rarely
seen before the prevalence of virtual currency. It has also been used to buy
and sell lethal toxins over the internet and as a payment method for virtual
kidnapping and extortion, allowing near-instantaneous transactions across the
globe between perpetrators of phishing and hacking schemes and their
victims.

Despite the significant challenges in investigating, much less prosecuting, this
activity, the department already has a strong record of bringing cases in which
virtual currencies were used to facilitate criminal conduct. While the
burgeoning assortment of online exchanges, virtual currencies and virtual
marketplaces has created a complex and evolving environment or "ecosystem"
as this audience knows it, we too are keeping pace and will pursue those who
exploit vulnerabilities in that ecosystem for illegal gain.

In this arena, we rely principally on money services business, money
transmission and anti-money laundering statutes. While individual users who
are not acting as exchangers or transmitters are not required to register with
FinCEN, many virtual currency systems, exchangers and related services are.
Additionally, most states also require money transmitters to obtain a state
license in order to conduct business in that state, and some like New York
have established virtual-currency specific licensing requirements. Any failure
to register or obtain a license may subject a money transmitter to criminal
prosecution, and a money transmitter that knowingly moves funds connected
to a criminal offense also faces prosecution for money laundering, regardless
of licensing status. Whether the currency involved is virtual or traditional, the
department enforces these critical laws to prosecute money services
businesses that engage in money laundering or facilitate crime by flouting
registration and licensing requirements.

The department's enforcement actions have evolved along with the virtual
currency ecosystem. Our first major action against a virtual currency service
used for illicit purposes was in 2007, when the Criminal Division's Asset
Forfeiture and Money Laundering Section (AFMLS), together with our
Computer Crime and Intellectual Property Section (CCIPS), spearheaded the
prosecution against e-Gold and its owners on charges related to money
laundering and operating an unlicensed money transmitting business. E-Gold
was a popular online currency exchange, and was a favored hub for
cybercriminals in part because of the lack of account holder identity
verification. An e-mail address was the only information needed to set up an
account, allowing global anonymous transactions. After a multi-agency
investigation, e-Gold and three associated individuals pleaded guilty in 2008 to
charges of money laundering and operating an unlicensed money transmitting
business.

In the wake of e-Gold's demise, the virtual currency system Liberty Reserve
was created. As alleged in our pending indictment, Liberty Reserve was
structured and operated to help users conduct illegal transactions
anonymously and launder the proceeds of their crimes.

Liberty Reserve quickly became one of the principal money transfer agents
used by cybercriminals around the world to distribute, store and launder the
proceeds of their illegal activity. Like e-Gold, any would-be account holder
needed little more than a working email address to move funds around the
globe. Again, this virtual currency platform became a favorite of
cybercriminals and other tech-savvy wrongdoers, enabling them to engage in
anonymous financial transactions, all conducted in violation of BSA
requirements.

Before the government shut down Liberty Reserve in 2013, it had accumulated
more than one million users worldwide, including more than 200,000 in the
United States, who conducted approximately 55 million transactions through
its system totaling more than $6 billion in funds. These funds included
suspected proceeds of credit card fraud, identity theft, investment fraud,
computer hacking, child pornography, narcotics trafficking and other crimes.

In a case jointly spearheaded by AFMLS and prosecutors from the Southern
District of New York, several of Liberty Reserve's top executives, including a
co-founder of the company, the IT Manager and its Chief Technology Officer,
have pleaded guilty to money laundering and operating an unlicensed money
transmitting business and have been sentenced up to five years in prison. The
creator of Liberty Reserve was extradited to the United States from Spain in
October 2014 and is currently awaiting trial, where he is, of course, presumed
innocent.

The department has also taken action against a number of individuals and
groups who sought to exploit decentralized systems such as Bitcoin and
anonymized dark web servers to finance illicit trade and activity in online black
markets.

The first major prosecution of a dark market website was by the Southern
District of New York in a case against Ross Ulbricht, aka "Dread Pirate
Roberts," who was arrested in October 2013 and convicted by a jury for his
role in creating and operating Silk Road, an online black market whose
payment operations exclusively used Bitcoin.

Silk Road - designed to act as a black-market bazaar completely free from
government regulation and oversight - attempted to enable its users to
exchange illegal drugs and other unlawful goods and services anonymously
and beyond the reach of law enforcement. It emerged as one of the most
extensive criminal marketplaces on the internet. Before it was dismantled by
law enforcement, Silk Road was used by thousands of drug dealers and other
vendors to distribute hundreds of kilograms of illegal drugs and other unlawful
goods and services to well over a 100,000 buyers, and has been linked to at
least six overdose deaths around the world. Further, Silk Road was also used
to launder hundreds of millions of dollars derived from these unlawful
transactions. And just a few weeks ago, in a federal courtroom in New York
City, Ulbricht was sentenced to a term of life in prison - a cautionary tale for all
those who would use dark spaces on the internet to flout the law.

The Silk Road story, however, did not end with Ross Ulbricht. Two federal
agents, sworn to uphold the law, were also apparently lured by the perceived
anonymity of virtual currency.

Carl Force, a Special Agent with the Drug Enforcement Administration, and
Shaun Bridges, a Special Agent with the U.S. Secret Service, were both
assigned to the Baltimore Silk Road Task Force, which investigated illegal
activity in the Silk Road marketplace.

Force served as an undercover agent. According to court documents, Force
went rogue and developed additional online personas to engage in complex
bitcoin transactions to steal hundreds of thousands of dollars from the
government and from the targets of the investigation. Independently, Bridges
also allegedly engaged in an even larger direct theft, illegally diverting over
$800,000 in virtual currency to his personal account.

Both individuals have been charged by the Criminal Division's Public Integrity
Section and prosecutors from the Northern District of California with wire fraud,
theft of government property and money laundering. These investigations and
prosecutions should send a strong message to those who would exploit
technology to commit crimes: no matter how anonymous people might feel
using virtual currency, their actions are not untraceable. People should not
assume that law enforcement will not notice when they act on the dark web, or
that we are not keeping up with emerging technology. Our successful
prosecutions have shown that neither the supposed anonymity of the dark web
nor the use of virtual currency is an effective shield from arrest and
prosecution.

In addition to the operators of Silk Road and the drug traffickers who
conducted their deals online in bitcoin, prosecutors from the Southern District
of New York have also taken action against those who enabled this activity
through the operation of Bitcoin currency exchanges. We understand that
there are legitimate exchanges, and many of those are working closely with
FinCEN and other regulators to ensure compliance with the law. But there are
also many exchanges that don't concern themselves with following the law.

From approximately December 2011 to October 2013, Robert Faiella ran an
underground Bitcoin exchange on the Silk Road website under the alias
"BTCKing," and sold bitcoin to users to fund their purchases on the site.

Faiella would run bitcoin orders through Charlie Shrem, who operated a New
York-based company that acted as a bitcoin to fiat currency exchange.
Although Shrem was the company's Anti-Money Laundering Officer and had
registered the company with FinCEN as a money services business, Shrem
failed to report any of BTCKing's activity, despite knowing it was being used
for illegal purchases. Shrem's assistance enabled BTCKing to finance Silk
Road transactions without collecting any personal identifying information from
customers. Faiella pleaded guilty to operating an unlicensed money
transmitting business involving funds he knew were intended to support
unlawful activity, and Shrem pleaded guilty to aiding and abetting Faiella's
operations. Just this past winter, they were sentenced to four and two years in
prison, respectively.

While these cases demonstrate that the criminal use of virtual currency has
grown rapidly in recent years, its comparative scale versus traditional money
laundering still pales in magnitude. Few virtual systems currently can
accommodate the hundreds of millions of dollars we have seen in certain
large-scale money laundering schemes involving government-issued currency.
That said, as virtual currencies become more mature and better understood by
criminals, we expect to see an increase in both individualized criminal activity
and large-scale money laundering enterprises.

In some ways, companies and individuals operating in the virtual currency
ecosystem are at a crossroads, and they have an opportunity to help virtual
currency emerge from its association with criminal activities. While there
obviously are good and legitimate reasons to use these currencies, industry
participants are now on notice that criminals too, make regular use of them.
So, to ensure the integrity of this ecosystem and prevent its penetration by
crime, the industry must raise the level of its game on the compliance front.

That includes strict compliance with money services business regulations and
anti-money laundering statutes. I understand that you have heard from our
partners at FinCEN this morning about our collaborative efforts to investigate
and enforce anti-money laundering laws, and you'll also hear more from Katie
Haun this afternoon about the investigation of the virtual currency business
Ripple Labs, which operated an unlicensed money transmitting business.

Ripple sold a virtual currency called "XRP," but failed for a time to register with
FinCEN as a money service business and failed to establish and maintain
appropriate anti-money laundering protections. Importantly, the department
resolved this investigation after Ripple agreed to a number of substantial
remedial measures. This includes cooperation in other ongoing investigations,
a change in business model and oversight by independent auditors, an
extensive look-back through their previous activities and development of an
extensive compliance framework.

The resolution with Ripple Labs underscores the importance of having a
strong compliance program to ensure adherence to the law. Virtual currency
exchangers and other marketplace actors comprise the front line of defense
against money laundering and other financial crime. Robust compliance
programs, such as those imposed on Ripple Labs, are essential to keeping
crime out of our financial system. If a money services business finds itself
subject to a criminal investigation, we will look, as we do in all cases involving
potential prosecution of a business entity, at the factors set forth in the
Principles of Prosecution of Business Organizations, or Filip Factors. Two of
the Filip Factors in particular, the existence of an effective and well-designed
compliance program and a company's remedial actions, including steps to
improve upon an existing compliance regime, are explicitly set forth as factors
prosecutors should consider.

As you know, there is no "one-size-fits-all" compliance program. Rather,
effective anti-money laundering and other compliance programs must be
tailored to meet the circumstances, size, structure and risks encountered by
each entity. And virtual currencies, with their perceived anonymity, pose
compliance risks that money transmitters such as Western Union do not face.
Industry participants must address those risks, even when it may be costly to
do so.

Just as in any other corporate investigation, when reviewing the conduct of, for
example, an exchange, the department will examine whether a company has
meaningfully addressed compliance. We have resolved cases against many
financial institutions and other entities, and are deeply familiar with hallmarks
of a genuine compliance program.

We expect virtual currency businesses to take compliance risk as seriously as
they take any other business risk. Now, we recognize that new entrants in
emerging fields may find that compliance requires a significant expenditure of
resources, and we will be context-specific in analyzing appropriate compliance
frameworks including consideration of the size and scope of the business. But
a real commitment to compliance is a must, particularly given the significant
risks in the virtual currency market. In the long run, investment in effective
compliance programs will be well worth it, especially in the event that a
company has to interact with law enforcement.

In many ways, I think that is a message that everybody gathered here today
can appreciate. As the virtual currency markets attempt to move past their
association with the Silk Roads and Liberty Reserves of the online world, are
used to finance legitimate activity, and are becoming increasingly subject to
regulation, robust compliance with existing anti-money laundering laws and
regulations is necessary - indeed, critical - to bolster the reliability and value
of virtual currency.

The challenges posed by the cases I've described are not unique to the virtual
currency world. Indeed, these dark web criminals are merely using new tools
to conduct the same old crimes, committing what is essentially street crime like
drug trafficking and extortion, but over computer networks.

For those investors, exchanges and compliance officers who deal in virtual
currency, compliance is of paramount importance. Adherence to regulations
and state license requirements can reduce the liability of corporations who
invest or deal in virtual currency. As seen with Ripple Labs, compliance and
remediation can lead to a more favorable resolution of criminal investigations
and adhering to anti-money laundering guidelines allows the legitimate use of
virtual currency to grow and be responsive to infiltration and abuse by criminal
elements. While the department will aggressively investigate and prosecute
criminal activity that is funded through virtual currency, money services
businesses that fall under the department's scrutiny can also receive credit for
meaningful and sincere compliance efforts.

Your compliance and cooperation will make it more difficult for those who
seek to operate illicit and underground marketplaces and will be a key element
for law enforcement to shed light on these illegal virtual currency transactions.
It also will help to ensure the continued viability of virtual currency systems in
the future.

Thank you for the opportunity to address this year's National Institute on
Bitcoin and Other Virtual Currencies.

[Source: DOJ, Criminal Division, Washington, 26Jun15]

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